2012 UNDERINSURANCE STUDY IN MALAYSIA

Life Insurance Association of Malaysia

&

Universiti Kebangsaan Malaysia

December 2013

2

Table of Contents

1. Executive Summary 3

2. Introduction 5

3. Objective of Study 6

4. Definition of Mortality Protection Gap 7

5. Scope and Limitations of Study 9

6. Methodology 10

7. Data Analysis 28

8. Protection Gap Results 38

9. Conclusion 42

10. Malaysian Life Insurance Environment 44

Appendix 1 50

Appendix 2 51

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1. Executive Summary

Mortality protection gap measures the extent to which families are underinsured

following the death of the primary wage earner. The findings of this study suggest that

many Malaysian households are substantially underinsured. Considerable size of the

protection gap is worrying since many dependents may not be able to maintain a

reasonable lifestyle in the event of the death of the primary breadwinner or they may

even be driven into poverty.

This study examined potential mortality gap among working population of the

country in 2012 who were either insured under life and medical insurance, or not insured.

The average protection gap for families whose primary wage earner was covered by life

and medical insurance was RM553, 000 per family. Families whose primary wage earner

was covered by life policy only and not medical policy had a slightly higher gap, at

RM642, 000 per family. The average protection gap for the group headed by breadwinner

who was not covered by either life or medical insurance was largest, at about RM723,

000 per family. However, based on the assumption of this study that each household in

Malaysia consists of 5 members (parents and 3 children), the average mortality gap for

each member of a family was about RM100, 000 to RM150, 000. This amount is quite far

from the per capita sum insured in Malaysia which is about RM34, 000. Thus, the

findings of this study clearly suggest that purchasing life insurance can provide solutions

to close the protection gap. In addition, an assumption was also made that the income of

the household was generated by one primary breadwinner. The true extent of the

protection gap may be smaller if the spouse of the primary breadwinner was also in

employment.

The protection gap is further estimated according to the age group of the

breadwinner. The families whose wage earner was between 26 to 55 years old had

sizeable protection gap compared with other age groups. This is evident given that many

breadwinners of this age group were typically at the phase when their financial

obligations reached their peak in terms of dependents‟ support, mortgage repayment,

savings creations and others. The study also found that the younger families whose

4

primary breadwinner was under 25 years old had a relatively high probability of being

underinsured. This finding suggests that the purchase of insurance among individuals

below the age of 25 is not encouraging enough although the premium rates for this age

group would be relatively low. Proactive measures must be taken to increase insurance

awareness among individuals of this age group to take advantage of the favorable

premium rates. This study also found a fairly large proportion of families headed by a

breadwinner above 55 years old and covered by life and medical insurance who had

sufficient resources to maintain current standard of living in the event of death of the

main breadwinner.

The results of this study are expected to provide an indicator for the industry to

move forward in achieving the targeted penetration rate of 75% by 2020 under the

Economic Transformation Plan. There exists a vast potential for growth in the life

insurance market, in light of government support through incentives on tax relief for life

insurance products as well as the changing socio-economic landscape and the

liberalization measures undertaken to stimulate the growth of the insurance industry.

5

2. Introduction

For many individuals, the financial consequences from the premature death of the

primary wage earner signify major personal loss exposure. As such, adequacy of life

insurance coverage provides an excellent opportunity to deal with this loss exposure.

The uses of life insurance have been highlighted in one‟s personal financial planning as

income replacement, debt repayment, savings creation and wealth replacement, among

others.1 The Chartered Life Underwriters (CLU) states that the objective of mortality

protection (i.e. life insurance protection) is to maintain the current living standard of

dependents upon the death of the main wage earner.2 Mortality protection gap quantifies

the extent to which families are insufficiently covered, or underinsured, in the event of

the death of the primary breadwinner.

Life insurance offers a relatively low-cost solution to close mortality gap. Closing

mortality gap allows the insurance markets to be better penetrated. In 2012, the life

insurance sector in Malaysia collected 67.7% of the insurance industry premium income.

Even though penetration rate (premiums as a percentage of GDP) and insurance density

(premiums per capita) have improved over time, the demand for life insurance remains

low compared to neighboring countries. Per capita spending on life insurance was

RM850 or USD330 in 2012, lower to the world average of USD373 and much lower to

other developed Asian countries. Singapore recorded per capita premium seven times

higher than Malaysia in 2012, while Hong Kong and Japan recorded per capita premium

twelve times higher. Similarly, life insurance penetration was 3.08% of the country‟s

GDP, slightly below the world average of 3.69%. These indicators suggest that the

Malaysian life insurance market is still substantially under-penetrated. Improvement in

the mortality protection gap allows the vast untapped insurance market to be explored to

the fullest.

1 Black K. and Skipper, H.D. (2000). Life and Health Insurance. 13

th edition. Prentice Hall. Upper Saddle

River, New Jersey 2 Sigma No 4/2004: Mortality protection: the core of life, p 23.

6

3. Objective of the Study

The main objective of this study is to investigate the extent of the life insurance

protection gap in Malaysia. The mortality protection gap is often a true reflection of the

potential demand for life insurance coverage. This study seeks to highlight and quantify

the magnitude of mortality gap protection, or underinsurance, among the Malaysian

working population in 2012.

A thorough investigation of the extent of mortality gap in Malaysia is timely. The

degree of underinsurance indicates the potential financial hardship endured by

dependents upon untimely death of the family‟s breadwinner. Inadequate life insurance

protection can prevent a family from maintaining its current living standard upon the

death of the main wage earner. Other dire financial consequences that may result are the

inability to pay off the mortgage, debts or children education. As insurance is one of the

most effective ways to deal with mortality gap, understanding the extent of the gap

allows the insurers to take proactive measures that can encourage life insurance purchase.

Furthermore, the local life insurance market (as well as family takaful market) is

still much under-tapped. In 2012, only about 41 percent of Malaysians were protected

under life insurance plans, the highest rate ever attained by the local insurance industry.

The demand for life insurance in Malaysia is apparently still far below that of other more

developed Asian markets. This is evident from the per capita life insurance premium

expenditures for Singapore, South Korea and Japan in recent years, which are more than

seven times higher than for Malaysia. As mortality protection gap is often a good

indicator of the potential demand for life insurance protection, the findings of this study

will offer important information for the insurers and policymakers to further develop and

promote the Malaysian insurance industry, given the relatively low insurance market

penetration.

7

4. Definition of the Mortality Protection Gap

The mortality protection gap is defined as the difference between the resources

needed and the resources that would be available to maintain the living standards of the

dependents following the death of the primary wage earner.3 The resources needed refer

to the resources surviving dependents require for income replacement, debt repayment

and other major expenses. The resources available refers to those resources actually

available to the dependents from financial assets (net financial assets/savings), social

security benefits and life insurance protections (sums insured of life insurance, medical

insurance plus the accumulated savings).4

Mortality protection gap quantifies the extent to which families are insufficiently

covered in the event of the death of the primary wage earner. It can also be used as a

gauge of the extent to which the citizens in a country are underinsured.

Swiss Re highlights the concept of mortality gap as follows:

“Life assurance protection gap is computed as the present value of future income

required to maintain dependents’ current living standard, plus the amount needed to

meet debt obligations, minus the sum of the present value of future social security

payments to survivors plus life insurance proceeds, plus one-half of financial assets”.5

Drawing on recent work by Swiss Re, a general form of the mortality gap functional

relationship can be described as follows:

3 Sigma No 4/2004: Mortality protection: the core of life, p 3

4 Journal of Financial Planning. (March 2013). Study Cites Gap in Mortality Protection.

5 Sigma No 4/2004: Mortality protection: the core of life, p 23

Mortality Protection Gap = Resources Required – Resources Available

8

The resources readily available mainly come from savings and life insurance. In light of

the mortality gap function specified above, the resultant conceptual framework of this

study can be portrayed as follows:

Drawing on mortality gap function proposed by Swiss, the resources required constitute

three elements:

(1) The income required to maintain the current standard of living for the spouse

and/or dependents.

(2) Retirement needs, university education needs for children and other major

expenditure needs.

(3) Liabilities, such as paying off debts and taxes.

The resources available encompass these components:

(1) Survivor income from social security

(2) Financial assets, such as personal savings and other investments such as stocks,

bonds and mutual fund.

(3) Life insurance coverage and coverage provided under employee benefit plans.

Income

Needed to

Maintain

Standards of

Living

Savings Life

Insurance = - -

Mortality

Protection

Gap

9

5. Scope and Limitations of Study

As noted in the Mortality Protection Gap: Asia-Pacific 2011 study published by

Swiss Re, the protection gap in Malaysia witnessed an increasing pattern during the

period 2000-2010, with the value of gap of USD380 billion reported in 2010. An

examination of the extent of underinsurance in Malaysia is thus opportune to provide

useful information to the insurers and the policymakers in formulating new strategies to

close the gap.

This research is the first mortality protection gap study undertaken by local

researchers for Malaysia. The methodology adopted for this study involves a simulation

process, called Monte Carlo analysis, and differs from the methodology adopted by other

studies such as the Mortality Protection Gap: Asia-Pacific 2011 or gap studies of

countries such as Singapore.6 Unlike deterministic analysis or single-point estimate,

Monte Carlo simulation provides a range of possible outcomes and the probabilities of

their occurrence. Parallel to the protection gap studies conducted by Swiss Re, this study

examines potential gap among employed populations with dependents. This is essential to

ensure that the study covers the economically active segment of the population who is

more likely to have the financial ability to purchase insurance. Besides the application of

Monte Carlo simulation, this study examines the mortality gap for three categories of

working populations; (1) individuals who are covered by life insurance (2) individuals

who are covered by life insurance and also medical insurance, (3) individuals who are not

covered by either life or medical insurance. Detailed discussions on the methodology of

this research are presented in forthcoming topics.

Although the present mortality gap study is certainly not exhaustive, it provides a

useful initial platform to a more broad understanding of the magnitude of the protection

6 2012 Protection Gap Study- Singapore, Life Insurance Association Singapore.

10

gap in this country. Aside from life insurance, there is also mortality protection provided

by family takaful plans that may influence the estimation of the gap. Mortality protection

afforded by family takaful is not incorporated in this present study, but can be considered

for future research work.

One of the major limitations of this study is the lack of official statistics such as

data related to salary according to age group and data on debt repayment. Due to the lack

of various useful statistics, the true extent of the mortality gap of this country may differ

slightly from the gap estimated in this study.

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6. Methodology

6.1 Conceptual Framework

Mortality protection gap (also referred to as life insurance protection gap or protection

gap or underinsurance) is defined as the difference between resources needed to maintain

average living standards and resources available. Typically, the resources available

consist of savings and life insurance (see Figure 1).

Figure 1: Conceptual framework of the mortality protection gap.

Drawing on mortality gap function proposed by Swiss Re, the classification of resources

needed and resources available are exhibited in Figure 2. The resources needed are

divided into 3 categories;

(1) The basic expenses - the income required to maintain the current standard of living

for the spouse and/or dependents

(2) The retirement expenses – income needed to provide for retirement needs

(3) The debt repayment expenses – income needed for paying off debts such as

mortgage.

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The resources available comprises of these categories:

(1) Employee Provident Fund (EPF) savings – income from social security

(2) Personal savings – financial assets

(3) Life insurance protections – individual life and medical insurance.

The magnitude of mortality protection gap estimated in this study approximates the

extent of underinsurance experienced by the population.

Figure 2: Resources needed and resources available

RESOURCES NEEDED RESOURCES AVAILABLE

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6.2 Data

The data used for this study were obtained from different sources as reported in Table 1.

The authors are indebted to the Life Insurance Association of Malaysia (LIAM) for

providing various life insurance, medical and critical illnesses data in support of this

research. The distributions of the data provided by LIAM can be viewed in Appendix 2.

Table 1: Sources of Data

Variable Sources of Data

Basic expenses Household Expenditure Survey Malaysia 2009/2010,

Retirement expenses EPF Annual Report 2012, Annual Statistics Reports

Debt repayment expenses Financial Stability & Payment System Reports, BNM

EPF savings EPF Annual Report 2012

Personal savings Annual Statistics Reports

Life and medical insurance LIAM and Annual Insurance Reports, BNM

6.3 The Resources Needed

6.3.1 Basic expenses

The first component of the resources needed is the income required to maintain the

current standard of living for the dependents following the death of the main

breadwinner. These resources are represented by the basic needs expenses. As

highlighted in the Household Expenditure Survey Malaysia 2009/2010, basic needs

comprise the following factors:

o Food

o Beverages and tobacco

o Clothing and footwear

o Housing

o Furnishing

o Health

o Transport

o Communication

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o Recreation service and culture

o Education

o Restaurants and hotels

o Miscellaneous goods and services

The basic expenditure incurred by households is illustrated in Figure 3 while the monthly

average of total expenditure per household is illustrated in Figure 4.

Source: Household Expenditure Survey Malaysia 2009/2010

Figure 3: Percentage expenditure per household by age of head of household, Malaysia

2009/2010

Figure 3 indicates that the largest portion of expenditure incurred by a household

was the housing expenses

I.e. for age group below 24 years old, between 25 to 34, between 35 to 44,

between 45 to 64 and above 65 years old, the percentage of housing expenses is

23.8%, 23.1%, 21.9%, 22.1% and 26.3% respectively.

The second largest expenditure was the food expenses.

I.e. 15.5%, 18.2%, 19.6%, 21.2% and 24.4% for each age group respectively.

15

For most age groups, the smallest amount of expenditures of a household was the

health-related expenses except for the age group above 65 years old. The

percentage of health expenses for the other age groups is 0.8%, 1.1%, 1.1% and

1.4% respectively.

Education is also among the smallest expenses incurred by a household; the

percentage of expense for each age group was 1.5%, 0.7%, 1.9%, 1.5% and 0.5%

respectively.

Source: Household Expenditure Survey Malaysia 2009/2010 DOS

Figure 4: Monthly average of total expenditure per household by age group of head of

household

Figures 4 suggest that the monthly average of total expenditure for each age group

increases throughout the three National censuses.

In the last two censuses, the most significant increase of the monthly average of

total expenditure was in the age group below 24 years old and age group between

25 and 34 years old. The increase is about 25% and 22% respectively.

1019 1525 1891 1703 1209

1290

1708

2149 2091

1637

1623

2096

2310 2338

1655

0

500

1000

1500

2000

2500

≤ 24 25-34 35-44 45-64 ≥ 65

Age

1998/1999

2004/2005

2009/2010

Year

RM

16

On the contrary, the increase in the monthly average of total expenses at the age

65 and above was very low which is only at 1%

Households headed by breadwinner up to age 64 years old witnessed an increase

in the monthly average of total expenditure; however it started to decrease from

age 65.

The monthly average total expenditure per household in 2009/2010 for age group

below 24 years old, between 25 to 34, between 35 to 44, between 45 to 64 and 65

years old and above was RM1, 623, RM2, 096, RM2, 310, RM2, 388 and RM1,

655 respectively.

It is worth noting that the monthly average total expenditure for all age group was

higher than the Malaysians minimum wage level of RM900.

The head of the household, who is also most likely the breadwinner of the family,

should bear these basic needs as long as they work. If he dies at any age before

reaching the retirement age, the dependents would still have to be provided with these

needs. Assuming that on average, a worker chooses to retire at age 60, therefore, the

required amount of basic needs is represented by:

6.3.2 Retirement expenses

The second component of the resources needed is the resources required to pay for the

retirement needs. This component is measured by the EPF contributions of an employee.

The biggest retirement expenses for Malaysians are the EPF contributions.

In this present study, only the contributions made by the employee is considered

for the retirement expenses as this contribution is deducted from the employee‟s

monthly salary

The EPF contribution is 11% from the basic salary of the employee.

17

Figure 5 and Figure 6 demonstrates the average monthly salary of Malaysians and the

average monthly EPF contributions.

Source: Department of Statistics

Figure 5: Average monthly salary of Malaysians

Figure 5 demonstrates that the average monthly salary increases by age until the

employee reaches the age 50 to 54. The average monthly salary decreases at the

age of 55 and above,

The highest average monthly salary recorded in 2012 was RM2, 670 attained at

the age between 50 to 54 years old.

The lowest average monthly salary in 2012 was RM720, attained at the age of 15-

19. This amount is below the minimum wage level imposed by the government.

The rate of EPF contributions is 11% of the monthly salary, and the distribution

of the average EPF contributions is displayed in Figure 6.

18

Source: EPF Annual Reports, 2010-2012.

Figure 6: Average monthly EPF contribution by age group

Figure 6 reveals that the average monthly EPF contributions continued to

increase until the employee reaches the age between 50 to 54 years old, and then

started to decrease starting from age 55.

The highest average monthly EPF contributions recorded in 2012 was RM293.70

and the lowest was RM79.20.

An employee contributes to the EPF throughout his employment period until the

age of 60 years old.

An employee should be paying the EPF contributions throughout his employment

period until he reaches the retirement age. However, he might die before reaching the

retirement age. Assuming that an employee chooses to retire at age 60, the required

amount of retirement needs can generally be expressed as:

19

6.3.3 Debt repayment expenses

The third component of the resources needed is the resources to pay off debts. In this

study, this component is represented by the debt repayment expenses. The distribution of

the debt repayment expenses is portrayed in Figure 7.

Source: Financial Stability & Payment System Reports

Figure 7: Household total debt

Figure 7 indicates that over the period 2008-2012, the household total debt

increased each year at a rate of between 9% to 12%, totaling RM586.9 billion by

2012.

“The numbers associated with Malaysia‟s household debt are an 83% debt-to-

GDP ratio at the end of March 2013, and a 140% debt-to-household-income ratio”

(Joseph, 2013).

20

It is believed that the large amount of indebtedness among Malaysian is attributed

to mortgage loans.

Agensi Kaunseling dan Pengurusan Kredit (AKPK) reported that a total of

35,825 cases have received counseling in 2012 which makes the whole counseling

cases so far stood at 229,334 cases. Of this total, 40.8% or 93,652 cases have

enrolled for Debt Management Programme (DMP).

The main reasons for the relatively high amount of debt are poor financial

planning, high medical expenses, failure in business, loss control on usage of

credit cards, lost job, death of breadwinner and failed investment.

It is also reported that cases enrolled for DMP consist of 35% private sector, 35%

unknown sector, 10% self-employed, 8% public sector, 8% unemployed and 4%

others employment.

The detailed demographic profile of individuals who enrolled into DMP is

provided in Appendix 1.

According to Bank Negara Malaysia (BNM) Report 2012 and Financial Stability

& Payment System Report 2012, the estimated debt service burden which is the

ratio of debt repayment to disposable income is 43.9%.

Source: Department of Statistics and BNM

Figure 8: Household debt by income group

21

Figure 8 demonstrates a direct relationship between income and debt repayment,

i.e. the higher the income the greater the percentage of debt repayment

In order to maintain data consistency, the percentage of debt repayment by salary

bands must be aligned with a specific age group, followed by the estimation of the

percentage of debt repayment.

Assuming that on average, the debt must be paid off until the employee reaches the

retirement age of 60 years old. However, the employee might die before reaching age 60.

In general, the required amount of debt repayment expenses can be represented as

follows:

6.4 The Resources Available

6.4.1 EPF savings

The first component of the resources available is the resources obtainable from social

security. This variable is represented by the EPF accumulated savings of an employee.

As at end 2012, EPF membership stood at 13,585,007 and of these numbers,

6,389,080 are actively contributing towards the Fund (EPF Annual Report, 2012).

In line to the increasing number of membership, total EPF contributions increased

by 11.45% amounting RM46, 178 billion in 2012.

The statutory contribution rate indicates that the rate for employee contributions is

11% and the rate for employer contributions is between 12% to 13%.

22

Source: EPF Annual Report 2012

Figure 9: EPF saving by age, 2012

Figures 9 illustrate EPF savings according to age group in 2012.

Based on Figure 9, a significant portion of EPF savings are contributed by

members between 31 and 55 years old, with total savings ranging from

RM46,694.2 to RM51, 284.32 billion.

The highest EPF savings amounting RM67, 248.8 billion was contributed by

members in the age group between 46 to 50 years old.

The lowest EPF saving of RM1.1 billion was contributed by members in the age

group of 16 years old and below.

The accumulated EPF savings can be withdrawn by an employee upon reaching

the retirement age.

In general, an employed person would continue to contribute into the EPF funds

throughout his employment period until reaching the age 60. However he may die at any

age during his employment.

23

Therefore, if a person dies at a certain age or lives to reach the age of

retirement, the EPF savings equal to the accumulated EPF savings at the

age of death.

6.4.2 Personal savings

The second component of the resources available is measured by the amount of personal

savings. Figure 10 displays the distribution of personal savings according to income

group in 2012.

Source: BNM Reports

Figure 10: Percentage of personal saving by income group

Figure 10 reveals that the higher the income of the wage earner, the higher the

amount of personal savings of a household.

24

On average, an individual who earns RM5, 000 a month have been found to save

as much as 14.2%, whereas individuals with a salary less than RM1, 000 a month

would save as much as 8.1%.

The percentage of personal saving by income group will be aligned with a

specific age group. Through this process, the percentage of personal saving by age

is obtained. This has to be done in order to maintain data consistency.

In general, an employed person would continue to save a portion of his salary

throughout his employment period until reaching the age of 60 years old. However, if

he dies before reaching the retirement age, he would cease to save at the age of death.

6.4.3 Life insurance protections

The third element of the resources available is the life insurance coverage. In this study,

the life insurance coverage is measured by the sums insured of the individual life

insurance and medical insurance protection. Figures 11 and 12 demonstrate the statistics

of the life insurance, medical and critical illness coverage.

Therefore, if a person dies at a certain age or lives to age 60, the personal

savings equal to the accumulated savings at the age of death

25

Source: Life Insurance Association of Malaysia (LIAM)

Figure 11: Percentage of Total Life Covered by Policy Type 2012

Based on the statistics shown in Figure 18, life insurance products accounted for

the biggest market share in the life insurance sector i.e. 56.05%.

This percentage of market share accounted for sums insured of RM516 billion.

The medical and critical illness policies are typically complementary to life

insurance policies with market share of 22.16% and 21.79% respectively.

The sums insured for the medical and critical illness in 2012 is reported at RM195

billion and RM152 billion respectively.

26

Source: Life Insurance Association of Malaysia (LIAM)

Figure 12: Total Sum Insured by Policy Type and Age Group

Based on Figure 12, the insureds in the age group between 19 and 34 years

old have the largest sum insured for all the three types of policies. The

sums insured for this age group for life, medical and critical illness is

RM227 billion, RM86 billion and RM72 billion, respectively.

The lives covered in the age range between 35 to 44 years old and 45 to 64

years old have a significantly large amount of insurance protection.

As expected, the insureds in the age group of 18 and below have a very

small amount of insurance for all the three types of policies.

The lives covered in the age group of 65 and above have the lowest sums

insured for life, medical and critical illnesses protection, i.e. at RM2

billion, RM0.52 billion and RM0.25 billion respectively.

The average amount of insurance for life, medical and critical illness

policy is approximately RM54, 000, RM41, 000 and RM53, 000

respectively.

27

In general, the death benefit constitutes the sums insured of the life insurance

policy payable to the beneficiary in the event of death to the policyholder.

Therefore, if a person dies at any age, the amount of insurance payable to

the beneficiary equals to the sums insured of all policies owned by the

person.

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7. Data Analysis

7.1 Assumptions of Study

The analysis carried out in this research is based on a few assumptions.

a. The samples of this study are the populations under employment

b. Each household has an average of 5 members (parents and 3 children)

c. The household income is solely contributed by the head of household

d. Interest rate = 4%

e. The personal saving includes savings in banks, Amanah Saham Bumiputra (ASB),

Tabung Haji and other financial institutions

f. Minimum working age : 20 years old

g. Maximum working age : 60 years old (retirement age)

h. The minimum, most likely and maximum values of monthly salary according to

age group are defined as follows:

Age Min Most likely Max

20-24 900 1000 3500

25-29 900 1500 12000

30-34 900 2500 16000

35-39 900 3000 20000

40-44 900 3200 30000

45-49 900 3500 30000

50-54 900 3500 30000

55-59 900 3500 30000

60-64 900 3200 30000

29

7.2 Model Development

The present value specification is given as below:

where:

In view of the present value specification, recall that the total resources needed have been

modeled as follows:

And the total resources available are modeled as follows:

The accumulated savings at the age of death

The sums insured payable to a beneficiary in the event of death of the policy

owner

The accumulated EPF savings at the age of death

30

Similarly, recall the framework of the mortality gap protection, i.e.

The value of the protection gap indicates the amount of insurance coverage a

household should acquire to ensure that the dependents can maintain a reasonable

standard of living following the death of the breadwinner.

7.3 Monte Carlo Simulation

The present study applies the Monte Carlo simulation in order to take into

consideration the variation of inputs.

Monte Carlo analyses are computer generated simulations which provide a range

of possible outcomes and the probabilities they will occur for any empirical

models with specific coefficient values and an error term distribution.

During a Monte Carlo simulation, values are sampled at random from specific

probability distributions.

By randomly generating values from the assumed distribution, various possible

outcomes within the assumed distribution will be created.

Common probability distributions include normal, lognormal, uniform, triangular

and discrete, among others.

In this study, the triangular probability distribution was deemed suitable to

represent certain data. Hence, the minimum, most likely and maximum values

needed to be defined for the probability distribution.

The number of samples generated in this study reaches at least 5,000 and the

result is a probability distribution of possible outcomes.

Monte Carlo simulation provides probabilistic results, i.e. results that show what

are the possible outcomes, and also the probability of occurrence of each

outcome.

PROTECTION GAP = TOTAL RESOURCES NEEDED – TOTAL RESOURCES AVAILABLE

31

Since 5000 possible values of input for present value of resources needed and

accumulated values of resources available were generated in this study, as much

as 5000 possible values of protection gap were obtained.

The ensuing protection gaps are shown in the form of distributions.

7.4 Probability Distributions of Simulated Variables

7.4.1 Distributions of Age

Figure 13 illustrates the age distribution of the employed populations in Malaysia

Figure 13: Distribution of Age

Table 2: Summary statistics of age

Age

Mean 35

Median 34

Maximum 60

Minimum 20

.

32

Referring to Figure 13, most individuals are in the age range of 20s and 30s years

old. As shown in Table 2, the average, median, max and min of the age

distribution is 35, 34, 60 and 20 years old, respectively.

In this study, the protection gap is calculated based on this age distribution. The

present value of basic needs, the present value of retirement expenses, the present

value of debt expenses, the EPF savings, the personal savings and the total sums

insured is computed based on the same age distribution.

7.4.2 Distributions of Resources Needed

Figures 14 - 16 show the distribution of simulated resources needed components i.e. the

present value of basic needs, the present value of retirement expenses and the present

values of debt repayment expenses.

Figure 14: Distribution of present value of basic needs

33

Figure 15: Distribution of present value of retirement needs

Figure 16: Distribution of present value of debt repayment

Table 3: Summary statistics of resources needed

Present Value of

Basic Needs Retirement Needs Debt Repayment

Mean 373,529 125,516 307,453

Median 397,381 100,086 235,271

Max 637,302 489,120 1,285,051

Min 206 208 545

34

Figure 14 indicates that the average amount of the basic expenses that the

dependents would have to bear upon the death of the breadwinner is between

RM400, 000 to RM500, 000.

The mean, median, maximum and minimum values for basic expenses that should

be shouldered by the dependents upon the death of the breadwinner are

approximated at RM374,000, RM397,000, RM637,000 and RM206 respectively

(see Table 3)

Meanwhile, the probability that the present value of retirement needs is in the

range of RM100, 000 to RM150, 000 is relatively high at 0.9 (see Figure 15).

The mean, median, max and min value for the present value of retirement

expenses is around RM121,000, RM100,000, RM489,999 and RM208

respectively (see Table 3)

The debt expenses that the dependents would have to assume upon the death of

the breadwinner stood at less than RM500, 000. However, there still exists a small

probability of a debt in excess of RM1 million (see Figure 16).

From Table 2, the mean, median, max and min value for the present value of debt

repayment expenses is about RM307, 000, RM235, 000, RM1, 285,000 and

RM54, respectively.

7.4.3 Distributions of Resources Available

Figures 17 - 20 describe the distributions of the simulated components of the resources

available, namely the EPF saving, personal saving, life and medical coverage.

35

Figure 17: Distribution of EPF saving

Figure 18: Distribution of personal saving

36

Figure 19: Distributions of the sums insured of life insurance protection

Figure 20: Distributions of the sums insured of medical insurance protection

Table 4: Summary statistics of resources available

EPF Savings Personal Savings Life Insurance

Sums Insured

Medical Insurance

Sums Insured

Mean 63,437 19,923 81,606 61,524

Median 50,259 10,102 74,628 67,071

Max 139,069 157,217 196,443 67,071

Min 6.469 0 10,295 42,223

37

Figure 17 show that EPF savings with the amount of RM50, 000 has the highest

frequency with the probability of occurrence of 0.99.

Mean, maximum and minimum value for EPF savings is RM63, 437, RM139, 069

and RM6, 469 respectively (refer Table 4).

For accumulated savings, Figure 18 indicates that the working populations seem

to have relatively small amount of personal savings. The average amount of

savings is about RM20, 000. The maximum total personal savings is recorded at

about RM158, 000 (see Table 4).

Based on Figure 19, the sums insured of life insurance ranges from RM50, 000 to

RM70, 000. However, there is only a small probability that the amount of sums

insured would exceed RM200, 000.

From Table 4, the mean, median, max and min value for life insurance protection

is around RM81, 000, RM75, 000, RM196, 000 and RM10, 000, respectively.

Figure 20 suggests that the amount of medical protection with the highest

frequency lies in the range of RM65, 000 to RM70, 000.

The mean and median of the sums insured of medical protection is RM62, 000

and RM67, 000, respectively. The maximum amount of the medical coverage

sums insured is recorded at RM67, 000 while the minimum amount is RM42, 000

(refer Table 4).

38

8. Protection Gap Results

Based on the mortality protection gap specification presented earlier, the results of the

protection gap estimation are provided below. Recall that Monte Carlo simulation

adopted by this study provides a range of possible outcomes and the probabilities of their

occurrence. The present study examines the mortality gap for three categories of working

populations; (1) individuals who are covered by life insurance (2) individuals who are

covered by life insurance and also medical insurance, (3) individuals who are not covered

by either life or medical insurance. The results for each category are presented in Tables

5-7.

Table 5: Protection gap of individuals covered by life and medical insurance

Age Group 15-25 26-35 36-45 46-55 56-65 TOTAL

Mean 468,089 681,498 677,127 324,530 -120,346 553,033

Median 436,395 653,972 620,389 270,948 -121,913 494,017

Prob (Gap>0) 1.00 1.00 0.99 0.87 0.14 0.94

Table 5 depicts the amount of protection gap for families whose primary

breadwinner was covered by life and medical insurance with the probabilities of

the gap occurring.

The average protection gap for families whose primary wage earner was covered

by life and medical insurance was RM553, 000 per family.

The probability of an average family to be underinsured is relatively high, i.e.

94%.

The protection gap for families headed by a breadwinner who was between 26

and 35 years old was largest, estimated at RM681, 000 per family.

The group headed by 36 to 45 year-olds had the second largest gap, at RM677,

000.

39

The families whose primary breadwinner was under 25 years old had a lower gap

of RM468, 000. However, statistically, these families are almost certain to be

underinsured since the probability of having protection gap for this group is 1.

The group headed by 46 to 55 year-olds had the lowest gap of RM325, 000.

Most average families headed by a breadwinner above 55 years old experience

negative protection gap which implies that these families had sufficient resources

to maintain current standard of living in the event of death of the main

breadwinner. Only about 14% of them expected to be underinsured.

Table 6: Protection gap of individuals covered by life insurance only

Age Group 15-25 26-35 36-45 46-55 56-65 TOTAL

Mean 561,862 775,506 768,722 393,140 -50,511 641,532

Median 530,880 745,565 709,059 337,310 -54,534 583,607

Prob (Gap>0) 1.00 1.00 1.00 0.95 0.31 0.96

Table 6 exhibits mortality protection gap of families whose primary wage earner

is protected by life insurance but not medical insurance.

The average protection gap for the group headed by breadwinner who was

covered only by life insurance was RM642, 000 per family.

The protection gap is found to be generally larger across all age groups compared

with individuals who are covered by life and medical coverage.

The average protection gap for families whose breadwinner was below 25 years

old was RM562, 000 per family.

The families who were headed by the 26 to 35 year-olds had a huge protection

gap of RM776, 000 per family.

The group headed by breadwinners between 36 and 45 years old had second

largest gap, at RM769,000, per family.

Families whose head was between 46 and 55 years old had a slightly lower gap of

RM393, 000 per family.

40

Quite a large proportion of families headed by a breadwinner above 55 years old

had sufficient resources to maintain current standard of living in the event of

death of the main breadwinner. Only about 31% of them might experience some

protection gap.

This finding suggests that mortality gap can be reduced by purchasing more life

or medical insurance, or by increasing the sums insured of the existing life

insurance.

Table 7: Protection gap of individuals not covered under life or medical insurance

Age Group 15-25 26-35 36-45 46-55 56-65 TOTAL

Mean 642,728 856,003 850,930 475,884 35,535 723,137

Median 610,912 827,723 792,063 417,913 19,509 661,057

Prob (Gap>0) 1.00 1.00 1.00 0.99 0.60 0.98

Table 7 shows that generally, the average gap for households whose primary

breadwinner is not covered by any life or medical policies is much larger across

all age group than families whose breadwinner is covered by at least one policy.

The results in Table 6 also indicate that households with breadwinner from any

age groups would experience some degree of underinsurance. No groups are

found to have sufficient resources for the dependents to maintain current living

standard following the death of the wage earner.

Families with breadwinner in the age group between 26 and 45 years old are

found to experience the highest amount of underinsurance compared with other

age groups.

The results further suggest that breadwinner in the age group of 15 to 45 years old

of this category are certain to experience underinsurance since the related

probability is 1.

The average gap for this category is found to be RM723, 000.

41

For families whose breadwinner in the age group between 26 to 35 years old, the

protection gap was a staggering RM856, 000 per family.

Those families headed by 36 to 45 year-olds had enormous gap of about RM851,

000 per family.

For breadwinner in the age group of 15 to 25 years old, the estimated gap was

RM643, 000 per family.

The group whose head of family was between 46 and 55 years old had protection

gap of 476,000 per family.

The probability of households with breadwinner in the age group of 56 to 65 years

old to experience some protection gap is 0.60.

These findings clearly suggest that protection gap can be closed by purchasing life

and medical insurance.

42

9. Conclusions

This study examined potential mortality gap among working population of the

country in 2012 who were either insured under life and medical insurance, or not

insured.

The average protection gap for families whose primary wage earner was covered

by life and medical insurance was RM553, 000 per family with the probability of

being underinsured at 94%.

Families whose primary wage earner was covered by life policy only and no

medical policy had a slightly higher gap, at RM642, 000 per family with the

probability of being underinsured at 96%.

The average protection gap for the group headed by breadwinner who was not

covered by either life or medical insurance was largest, at about RM723, 000 per

family with the probability of experiencing underinsurance at 98%.

These findings clearly suggest that purchasing life insurance can provide solutions

to close the protection gap.

In this study, the assumption made is that the income of the household is

generated by one primary breadwinner. The amount of mortality gap is expected

to reduce if the spouse of the family is also employed.

Based on the assumption of this study that each household in Malaysia consists of

5 members (parents and 3 children), therefore average mortality gap for each

member of a family is about RM100,000 to RM150,000

The highest mortality gap is experienced by the age group between 26 to 55 years

old. This can be explained by the large financial obligation typically faced by the

breadwinner in this age group. Insurance coverage seems to be insufficient for

these individuals.

The findings of this study indicate that families with breadwinner in the age group

of between 15 and 25 years old have a high probability of experiencing

underinsurance. This finding suggests that the purchase of insurance among

individuals below the age of 25 is not encouraging enough although the premium

43

rates for this age group would be relatively low. Proactive measures must be taken

to increase insurance awareness among individuals of this age group to reap the

benefits of favorable premium rates while financial obligations are still minimal.

A large proportion of households whose breadwinner in the age range of 56 to 65

years old and was covered by both life and medical insurance did not experience

protection gap. This clearly suggests that life insurance offers solution to close the

protection gap.

44

10. The Malaysian Life Insurance Environment

In the estimation of mortality protection gap, life insurance is one of the

components of resources available. This component is measured by the sums insured of

life insurance policies. Figure 21 displays the sums insured of the life insurance sector for

the period 2000-2012. In 2012, sums insured in force grew by 11.43% from 2011 with

an average annual growth of 7.83 % during the last ten-year period.

Source: Insurance Annual Reports and http://www.bnm.gov/insurance, 2000-2012.

Figure 21: Total Sums Insured In Force for Life Insurance

The significance of life insurance as an essential part of the financial system is

exhibited in the growing per capita and per member of employment sums insured. Per

capita sums insured reflects the average insurance protection enjoyed by each citizen of a

country. In 2003, the figure was recorded at RM12, 374 and in ten years period, per

capita sums insured grew by 63.7% to reach RM34, 877 in 2012. The sums insured per

member of employment also increased from RM53, 878 in 2003 to RM80, 465 in 2012 as

45

exhibited in Figure 22. The sums insured of a life insurance policy reflects one of the

resources available to enable the dependents to maintain the current living standard in the

event of death to the policyholder. The cheapest and fastest way to close the mortality

gap is through the purchase of life insurance protection.

Source: Insurance Annual Reports and http://www.bnm.gov/insurance, 2000-2012.

Figure 22: Sums Insured In Force for Life Insurance – Per Capita and Per Member of

Employment.

The premium income of the life insurance sector amounted RM24, 902.5 million

in 2012, which accounted for a share of 67.7% of the total insurance industry premium.

The premium income of life insurance grew on average by 8.84% per year in the past

decade, compared to 5.09% the average growth rate of the economy. Although the

importance of life insurance as a medium for long-term savings and as an alternative

investment option remained evident by the positive growth in premium income, global

financial crisis experienced between 2007 and 2011 resulted in fluctuating growth rates

as depicted in Figure 23. Nevertheless, the relatively under-tapped life insurance market

46

is expected to record a compound annual growth rate (CAGR) of 7.5% over the years

2012–2016.7

Source: Insurance Annual Reports and http://www.bnm.gov/insurance, 2000-2012

Figure 23: Premium Income of Life Insurance

The growth of the Malaysian life insurance market is also evident from the rise in per

capita premium expenditure (or insurance density). Over the period of ten years,

premium per capita increased by 73.8%, from RM489 in 2003 to RM850 in 2012 as

exhibited in Figure 24. Over the same period, premium per member of employment also

grew by 50.2% from RM1, 237 in 2003 to RM1, 957 in 2012. The annual average

premium per capita of the total population and of the working population in the previous

five-year period was RM759 and RM1, 793, respectively.

7 Life Insurance in Malaysia, Key Trends and Opportunities to 2016

47

Source: Insurance Annual Reports and http://www.bnm.gov, 2000-2012 .

Figure 24: Premium Expenditures for Life Insurance – Per Capita and Per Member of

Employment.

Although the penetration rate (premiums as a percentage of GDP) and insurance

density (premiums per capita) have improved over time, the demand for life insurance in

Malaysia remains low compared to other more developed Asian countries. Per capita

spending on life insurance was RM850 or USD330 in 2012, lower to the world average

of USD373. In the same year, Singapore recorded per capita premium of USD2, 472,

Hong Kong USD4, 025, Taiwan USD3, 760, Japan USD4, 143 and South Korea USD2,

785. Similarly, life insurance penetration in Malaysia was 3.08% of the country‟s GDP in

2012, and relatively below the penetration rate of neighboring countries. The world

average of penetration rate in 2012 is 3.69% (See Figure 25 and Figure 26). These

indicators suggest that growth opportunities in the Malaysian life insurance market are

substantial.

48

Source: Sigma: World Insurance 2012, Swiss Re.

Figure 25: Life Insurance Density (life insurance premiums per capita) for Malaysia and

Selected Asian Countries.

Source: Sigma: World Insurance 2012, Swiss Re.

Figure 26: Life Insurance Penetration (life insurance premiums as a percentage of GDP)

for Malaysia and Selected Asian Countries.

49

Market penetration can also be defined as „the ratio of the number of policies in

force as a proportion to the total population‟.8 For the period 2000 to 2008, the life

insurance market penetration rate increased from 31.5% to 40.75%. The penetration rate

has since remained at about 41%. The rate in 2012 was recorded at 41.22%. As

consumer‟s confidence in life insurance rises, and with government incentive on tax

relief for life insurance products, market penetration is expected to steadily increase,

driving the growth in the life insurance sector.

Source: Insurance Annual Reports and http://www.bnm.gov, 1990-2012.

Figure 27: Market Penetration of Life Insurance (in percentage).

8 Insurance Annual Report, BNM, 2001

50

Appendix 1: Enrolment in the Debt Management Program

Table 1: Demographic Profile of Individuals Who Enrolled Into DMP 2007 2008 2009 2010 2011 2012 20131 Total %

Breakdown by gender

Male 1,868 6,355 11,621 10,047 10,357 9,949 6,337 61,269 65.4

Female 828 2,598 5,520 5,231 5,225 4,974 3,213 29,713 31.7

Not Stated2 2,248 90 47 3 - - - 2,670 2.9

Total 4,944 9,043 17,188 15,281 15,582 14,923 9,550 93,6523 100.0

Breakdown by age

20≤x<30 3,516 1,394 2,954 2,662 2,350 1,885 959 17,642 18.8

30≤x<40 745 4,084 7,461 6,189 6,277 6,026 3,829 37,239 39.8

≥40 683 3,565 6,773 6,430 6,955 7,012 4,762 38,771 41.4

Total 4,944 9,043 17,188 15,281 15,582 14,923 9,550 93,652 100.0

Breakdown by salary

<24 4,942 9,043 14,434 6,722 5,064 4,113 2,799 52,462 56.0

24K≤x<36K 2 - 1,206 3,579 4,423 4,261 2,470 16,723 17.9

36K≤x<48K - - 752 2,420 2,903 2,965 1,859 11,364 12.1

≥48K - - 796 2,560 3,192 3,584 2,422 13,103 14.0

Total 4,944 9,043 17,188 15,281 15,582 14,923 9,550 93,6523 100.0

Breakdown by marital status

Married 1,291 7,018 12,877 11,516 12,070 11,626 5,749 62,137 73.7

Single 268 1,381 2,938 2,582 2,449 2,294 1,053 12,965 15.4

Divorced 74 365 672 723 808 713 374 3,729 4.4

Widow/widower 30 148 307 294 255 290 197 1,521 1.8

Not Stated2 3,291 131 394 166 - - - 3,982 4.7

Total 4,944 9,043 17,188 15,281 15,582 14,923 9,550 93,6523 100.0

Source: AKPK Note:

1Total Debt Management Program (DMP) case received at month end.

2Breakdown by gender and marital status only made mandatory in CCDM in 2011

3Adjusted for invalid data and manual opening balance of 4,898 (prior to CCDMS) in March 2013

51

Appendix 2: Life Insurance Data

The data on sums insured, number of life covered and premium volume for life, medical

and critical illnesses coverage provided by LIAM.

Figure 1. Total Sum Insured by Age and Policy Type

52

Figure 2. Sum Insured (Life Policy) by Age and Gender

Figure 31. Sum Insured (Medical Policy) by Age and Gender

Figure 3. Sum Insured (CI Policy) by Age and Gender

53

Figure 4. Premium Income by Age and Policy Type

Figure 5. Premium Income (Life Policy) by Age and Gender

54

Figure 6. Premium Income (Medical Policy) by Age and Gender

Figure 7. Premium Income (CI Policy) by Age and Gender

55

Figure 8. Live Covered by Age and Policy Type

Figure 9. Live Covered (Life Policy) by Age and Gender

56

Figure 10. Live Covered (Medical Policy) by Age and Gender

Figure 11. Live Covered (CI Policy) by Age and Gender

57

Figure 12. Sum Insured by Region

Figure 12: Premium Income by Region

58